The U.S. retail sector remains stable and should see “fairly healthy” growth of 3% to 4% this year, ticking up to 4% to 5% next year thanks to some solid macroeconomic underpinnings, Moody’s Investor Service said Monday.
The biggest growth drivers in retail can be found in the home improvement, dollar stores, specialty retail and off-price sectors, according to a note emailed to Retail Dive. E-commerce sales, which are still only 8% or 9% of total retail growth, will continue to gain momentum and outpace overall retail growth “as more companies harness this expanding channel,” wrote Mickey Chadha, Moody’s vice president and senior credit officer.
But certain segments — including department stores, apparel and footwear, office supply and discounters and warehouse clubs — will continue to be weak, Chadha wrote.
Analysts have several reasons to believe that the upcoming holiday season will be a healthy one for retailers. “Better credit availability for consumers, along with improving consumer confidence and wage growth and lower unemployment, will push sales growth this holiday season,” according to Chadha.
In a separate note, retail analyst Ken Perkins of Retail Metrics agreed that retail is supported by favorable conditions like solid employment, a steady and rising housing market, modest personal income gains and increasing consumer net worth, adding that shoppers have shrugged off election uncertainty and continue to spend. But all that isn’t translating to retail sales growth, Perkins warned.
“The overarching question each month is will these favorable conditions translate into improved revenue and earnings growth for publicly traded retailers? Based on current Street expectations it doesn’t look like it,” he wrote.
The imminent conclusion of the U.S. presidential campaign could boost sales, Perkins added. “We would note that the highly unusual nature of the U.S. elections this fall may well have diverted consumers attentions away from shopping, but any forgone purchases in October will likely be made up in November and December.”
Holiday sales themselves will be better, too, according to Moody’s, which expects to see a “fairly healthy” 3% to 4% retail sales growth this season after last year's disappointing results. “But retailers must manage promotional cadence to maintain margins,” Chadha warned.
Holiday discounts and deals, something that shoppers are keen on, aren’t the only margin killers. As e-commerce grows, so do the costs of fulfillment and delivery, which was starkly demonstrated by e-commerce giant Amazon’s third quarter earnings report last week. The report included a surprise earnings miss as growth in Amazon's delivery costs outpaced growth in its sales, and a 29% year-over-year increase in operating expenses almost totally wiped out its profits.
Amazon’s results “still represented stellar growth in terms of both year-over-year income and revenues,” Perkins noted, adding that its 44% year-over-year growth is coming out of many of its competitors’ market share. But Nick Egelanian, president of retail development consultants SiteWorks International, said that Amazon will eventually have to rationalize its shipping costs and that when they do, “growth will fall off a cliff.”
Amazon is "buying sales with massively subsidized shipping costs — in this case, nearly $4 billion — in one quarter,” Egalian said in an email to Retail Dive. “These costs will only increase as same-day shipping and delivery and store opening costs multiply later. When they eventually rationalize shipping costs, growth will fall off a cliff. This is their reality — and now Wal-Mart is chasing them down the same rathole.”
This story is part of our ongoing coverage of the 2016 holiday shopping season. You can browse our holiday page for more stories.